Clients are increasingly aware that the days of cleaning out their desk, receiving a gold watch and retiring worry-free to their favourite golf courses and beaches around the world has become a thing of the past.
Several research reports indicate that an increasing number of Canadians expect to retire with a significant amount of debt. The main culprit: mortgage debt.
According to Toronto-based Fidelity Investments Canada ULC’s Retirement 20/20 report, 32% of pre-retirees and 24% of retirees were strongly or somewhat worried about the amount of debt they were carrying.
Although 55% of respondents said they had no debt, 27% reported having between $5,000 and $100,000 in financial obligations and 7% acknowledged having more than $100,000 in debt.
Some debt can make sense
Peter Drake, vice president of retirement and economic research with Fidelity in Toronto, says that while carrying debt into retirement isn’t desirable, doing so can make sense for some clients – but only if they understand the issues and what their take-home income in retirement is going to be.
That’s easier to do if your clients have a defined-benefit pension plan but trickier with a group RRSP or defined-contribution pension plan because stock market performance will have an impact on income.
“When I do seminars, I don’t tell people they shouldn’t have debt in retirement,” Drake says. “But they have to understand that it’s a fixed cost that has to be paid every month and whether that will get in the way of other things they need or want to do.
“One of the big parts of the [mortgage] decision is the monthly payment,” Drake adds. “Lenders are making sure the debt-servicing ratios are within acceptable norms. It’s been relatively cheap to borrow and house prices are rising, which makes [homes] look like better investments.”
In fact, there has been a sea change in the attitude toward debt over the past 30 or 40 years, Drake says, and it has become much easier to get.
Credit cards used to be the exclusive domain of the bank’s best customers; today, first-year university students across the country are deluged with credit card applications.
An obstacle for many clients
For some Canadians, though, a comfortable retirement is not top of mind.
“There is a growing number of seniors who are faced with the prospect of declaring bankruptcy,” says Chris Buttigieg, senior manager of wealth planning strategy with Bank of Montreal (BMO) in Toronto.
The top five causes of this late-in-life financial disaster are overextension of credit, medical expenses, insufficient income, loss of employment income and mismanagement of money.
In a recent BMO survey, Buttigieg says, 56% of pre-retirement baby boomers considered their current level of debt to be an obstacle to reaching their retirement goals.
And, according to Statistics Canada, almost half of Canadians aged 50 to 59 carry a mortgage and 25% of Canadians aged 60 to 69 still have a mortgage.
Financial advisors can play a significant role in making clients’ retirements as stress-free as possible, Drake says. Although an asset-allocation conversation used to revolve around stocks, bonds and cash, it now should be extended to include housing.
“By virtue of housing prices having gone up so much, a lot of investors have changed their asset allocation by that broad definition,” he says. “People need to be sensitive to interest rate changes and to what extent they need to use their homes to generate retirement income and [meet their] debt-servicing ratio.”
You also might be able to identify certain areas in which your clients can cut their expenses and redirect that money to paying down their debt, Buttigieg says.
As part of this process, it’s important to distinguish between good and bad debt, he adds. Credit card balances obviously are bad. And if a client is carrying $100,000 in non-registered investments and a $100,000 line of credit, selling those investments to pay off the line of credit makes good financial sense.
“Then, they can get a leveraged investment loan and repurchase the investments,” Buttigieg says. “The interest on the loan is tax-deductible.”
Disproportional use of debt
Charlie Spiring, vice chairman of Montreal-based National Bank Financial Ltd. in Winnipeg, believes the use of debt is growing disproportionately in Canada. Notably, the mega-rich don’t use much debt at all while the middle class is using more.
“The [middle class have] had a good lifestyle and it’s tougher to maintain it [today],” he says. “They’re using debt to assist that, and it scares me. It can open up a lot of room for error.
“But if you’re trying to accelerate your savings,” he adds, “there may be some benefit because you may not have to work as long into retirement if you’ve used debt effectively. If you’re borrowing at 2% but making 12% in the market, your nest egg will grow much quicker.”
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